Monthly Archives: June 2012

Post navigation

We love a dispatch from the Saipan Times, dated June 29, 2012, entitled NMI Supreme Court Hands Out Ruling in Eminent Domain Case. It may or may not set a record of sorts, but even if not, it is certainly up there in championship territory of baronial leisure in litigation.

In 1993 — that almost 20 years ago — the Marianas Commonwealth took the owners’ land to improve a road. But it overlooked one little detail: it failed to pay just compensation. It took 10 years of negotiation but patience seemingly paid off when in 2008 — that’s 15 years after the taking — the parties agreed on compensation of $4,196,524. But when the owners tried to enforce the settlement agreement by seeking a writ of execution, the trial court refused to issue one on the grounds that the legislature had not appropriated funds for this taking and a local statute states that any final judgment of a court [against the government] shall be paid only pursuant to an item of [legislative] appropriation. So his trial Lordship concluded that he had no authority to issue the writ. But he awarded title to the condemnor in spite of this blatant violation of the Just Compensation Clause of the Fifth Amendment, and to add insult to injury, he refused to award post-judgment interest.

Like us, we hope you will be relieved to learn that the local supreme court reversed. That’s the good news. The bad news is that the supreme court also held that enforcing the judgment without a legislative appropriation would violate the separation-of-powers doctrine. The other item of good news, however, is that in the absence of payment of just compensation, it was illegal to convey title to the condemnor, so title would remain with the owners until the condemnor paid just compensation. And post-judgment interest on the judgment would continue accruing. Let’s see now — that’s interest on $4,196,524 for 19 years and counting. Hoo boy! Since we don’t know what the Saipan judgment interest rate is, we can’t calculate the amount due by now. But we are mindful of the “the rule of 72″ whereby if you take 72 and divide it by the interest rate expressed as an integral number (rather than a decimal fraction), you get the number of years in which the amount due doubles. You can take it from there.

To read the news story on this case, click here. We are not clear how they do it over there, but if you go to the site you’ll get the Marianas Variety newspaper, but if you print out the article, the source is identified as the Saipan Tribune. Go figure. The article also contains a link to the Marianas Supreme Court home site.

Afterthought. So what now? Since the owners continue to own the land on which the commonwealth built a road, they should be able to put up a barricade and charge tolls to the passing traffic. That would get the condemnor’s attention, wouldn’t it?

The news story about a proposal to condemn “underwater” mortgages for their current fair market value and then make a deal with the homeowner-mortgagors whereby their loan balances would be written down to such fair market values (presumably plus an increment for profit to the movers behind this proposal, who would also raise the funds for its implementation) is spreading on the internet. Today’s Google Alert on eminent domain, for example, has six items about this stuff.

But what we find interesting is that so far nobody writing or blogging about this proposal has shown any sophisticated understanding of eminent domain law, particularly when it comes to valuation. What these folks seem to overlook that a vast majority of eminent domain cases that are litigated deal with controversies over valuation, not the right to take, even though it is the latter — especially after the Kelo case — that gets the publicity.

But valuation of mortgages, particularly valuation of mortgages that are bundled into securitized bonds, or owned by Freddie and Fannie or insured, or guaranteed by the feds, will give rise to unprecedented valuation problems that will keep the courts and condemnation lawyers busy for years to come.

If you are interested in those problems, scroll down and check out our posts on this subject, dated June 1, 2012 (click here), and June 22, 2012 (click here).

It seems that if the Los Angeles Times is to be believed, urban populations are rising at the expense of suburbs which are not losing population, but are only experiencing slower growth than they did in the past decade. See Don Lee, U.S. Cities Growing Faster than Suburbs, L.A. Times, June 28, 2012. But even if you are a “new urbanist,” don’t pop the champagne cork just yes. The growth reported in this dispatch represents only one year, and as we know, one swallow does not summer make, nor one year a trend.

Moreover, the reported urban growth is uneven. New York, Boston and Philadelphia saw increased population growth as compared to last year. But these are cherry-picked examples. New Yotk is unique because its most desirable part is an island whose inhabitants have been disproportionately employed in the well paying finance industry. Boston is a big time college town, which tends to attract people. On the other hand, Detroit, Cleveland and St. Louis continue losing population.

We claim no particular expertise in urban demographics, but based on several years’ worth of observation, the past boom in the suburbs was fueled, among other things, by the perception of the past several decades that buying a suburban home was a sure-fire path to wealth (or at least to increased net worth). So once the bubble popped and the financial escalator stopped, it shouldn’t have come as a surprise that more people would refrain from buying suburban homes (which aren’t being built in large numbers anyway), at least temporarily. And since they have to live some place, an increase in urban renters would seem like a natural consequence of these events. Besides, the new urban dwellers are largely young people, so it is at the very least an open question whether they will stay put in cities, or move out to the suburbs when they marry and have children (not necessarily in that order these days).

What we don’t see discussed in all this chit-chat is schools. The choice of a public school is the largest single factor in a family’s decision on where to live. And urban schools too often remain unsafe and of poor educational quality. But we don’t hear much about that, or how to improve them, from the “new urbanists.”

So once again, we’ll just have to wait and see what happens when (a) the housing market improves, and (b) the young folks attracted to cities by the comparatively cheap rents, marry and procreate.

Stay tuned, and take another look at this situation in a few years because comparing the statistics for one year (2010-2011) with a decade-long record does not strike us as a good idea. Extrapolation is tricky, especially as a long-term predictive tool.

We are indulging in the possibly unjustified presumption that if you are reading this post, you have an interest in the adventures and misadventures of the proposed high speed railroad in California, that as proposed would run from Los Angeles to San Francisco. It is even possible that you have been checking out our posts on that subject from time to time.

It hasn’t been beer and skittles for the railroad planners, and the proposed high speed railroad’s projected cost (that snookered the voters into approving it in 2008 with a grossly unrealistic estimate of $9 billion) has ballooned up to, first, $98 billion, and now, after the state recoiled from that lofty number, has settled down somewhere over $60 billion. But whatever that figure is or will turn out to be, construction has to get going or California will lose some $3 billion in federal money, a prospect that, if you are a local politico, is a fate worse than death. After all, if you can’t get your hands on federal money wherewith to fund nifty local stuff like garlic festivals and railroads, what’s the point of having a federal government? So construction has to get going to placate the feds, and Governor Jerry Brown wants the legislature to appropriate $6 billion right now, to get things started.

But as you may recall, construction plans call for acquiring the right of way and beginning construction in the Central Valley from Bakersfield to Fresno (or is it Modesto?). Anyway, the idea is that this right-of-way segment will become the backbone of the new rail line, and will require the state to complete it at a later time, or failing that, to die of ridicule.

But now, here comes a zinger from out in left field. Though passage of this appropriation is said to be a shoo-in in the California Legislature, things don’t look so rosy in the state Senate. It seems that some Senators don’t like the governor’s if-you-build-it-in-the-Central-Valley-they’ll-come approach, and are thinking along the line of bulding the initial segments of that railroad in their own populous districts where — they argue, not without merit — the people are, and where one can count on some utility and some revenue-generating ridership as soon as trains start running, as opposed to the Central Valley where . . . Have you ever been there? Great place for growing veggies and stuff, but who would actually want to go there?

Anyway, whether Governor Brown will be able to muster enough Democratic votes in the State Senate to fund his plan his way is now in some doubt. Republican votes don’t count because California is for all practical purposes a one-party state. So once again, stay tuned and see how it all turns out.

The Los Angeles Daily Journal of June 22, 2012 (Jury Orders Utility to Pay Property Owners), reports the results of a two-week eminent domain trial in San Diego, as follows. The evidence of value presented by San Diego Gas & Electric Co., the condemnor, was $701,400. The jury award (evidently accepting the owners’ valuation evidence) was $8 million.

The Daily Journal article is a bit sketchy on details (it does not report what the condemnor’s pre-litigation offer was, nor the actual amount of land taken out of the owners’ 115-acre larger parcel), but it appears that the bone of contention was the value of minerals under the subject property, consisting of “granite deposits used in concrete, asphalt and other construction projects [sic].” The owners contended that the taking would interfere with mining. The condemnor contended that the property’s highest and best use was for low-density residential. Evidently, the jury disagreed.

As we noted a few days ago (click here), there is an idea afoot whereby mortgages of “underwater” homes would be taken by eminent domain at their fair market value, not the nominal loan balance (which is much higher), and then the loans secured by them would be restructured to make them affordable to the “underwater” homeowners who could now resume paying off their restructured, lower balance mortgage with payments they could afford. The losers would be the lenders who lent money on those mortgages but who now would receive the current fair market value of their secured note, which these days is a lot less than what they originally lent because those mortgages aren’t likely to be repaid so they are not worth nearly the amount of the loan. Sounds deceptively simple to us. Aside from the fact that, as we noted earlier, this could jeopardize the soundness of some banks holding these loans, it turns out that there are other complications — like the fact that a lot of those loans are guaranteed by the government or by Fannie and Freddie, and many of them have been securitized into mortgage-backed bonds.

Anyway, we just came across an article by Reuters.com that describes this poposal in more detail, and deals with some of these complications. It’s Felix Salmon, Why Using Eminent Domain for Liens Is a Bad Idea — click here. If you are interested in this subject, it’s a good read that explains some of the problems with this scheme and reminds us, if any such reminder were needed, that the devil is in the details. And one of these details is what to do in states in which mortgage loans provide for recourse against the borrower when the mortgage is foreclosed on but the foreclosure sale does not bring enough to cover the loan balance.

In the meantime the Internet is buzzing with news stories about this proposed scheme, although most of what is said is rather superficial. But San Bernardino County in California is apparently going ahead with this scheme, being as it got hit hard by the collapse of the “bubble.” So stay tuned and see how it turns out.

When last heard from, California Governor Jerry Brown announced that he wanted to “protect the [high speed rail] project from injunctions sought by environmental lawsuits,” so he wanted to modify the environmental review process, as part of his legislation which, among other things, would appropriate some $6 billion to start construction. Predictably, environmentalists have put up a fight; they wa nt a full-bore environmental review, down to such things as diesel engine emissions from the equipment used in the construction. And so we learn from today’s Los Angeles Times, that the governor has backed down, although word to that effect has come not from himself, but from his staffers. See Ralph Vartabedian and Chris Megerian, Bullet Train Exception to Be Scrapped, L.A. Times, June 21, 2012, at p. AA1.

No word as to what will be the expected delay in construction. Stay tuned.

Seacostonline.com of June 20, 2012, reports a jury verdict in Portsmouth, for the taking of two easments across a business property — a bicycle shop named Papa Wheelies. Elizabeth Dinan, City Loses Eminent Domain Lawsuit, Ordered to Pay $125K. The article does not report the city’s offer but its evidence at trial was $18,500. The opinion of the State Land Board (which we presume is sort of like commissioners) was $27,000. The jury verdict was $125,000, or over six times the city’s evidence. To get the story, click here.

Don’t miss the July 2012 issue of the Practical Real Estate Lawyer, a publication of what was called ALI-ABA, now ALI-CLE. Specifically, what we have in mind is the article by Michael Rikon, entitled I Represented the Devil In Brooklyn, at p. 5. Not to keep you in susopense, we should mention up front that “The Devil” is Daniel Goldtein, the named plaintiff in Goldstein v. Pataki and Goldstein v. Empire State Development Corp., respectively, the federal and state cases in which Mr. Goldstein challenged the taking of his place in Brooklyn for redevelopment. Mr. Rikon is the leading eminent domain lawyer in New York who represented Mr. Goldstein in his fight for just compensation.

If you are into eminent domain, this is a good, informative read, that tells the story of the machinations that accompanied that controversy.

The only thing that is missing from Mr. Rikon’s story is what has been happening on the ground after the courts ruled in the city’s favor. We know that construction of the basketball arena for the redeveloper has begun, and that construction of the promised housing has not. Beyond that we are short on details, but we have a hunch that this is a part of the story that needs telling. This taking involved over 100 acres of urban land, so there may just be another Kelo-style disaster unfolding there — i.e., a taking of much urban land that in spite of the condemnor’s rosy prognostications, remains vacant and unused after spending a fortune in public funds. So why hasn’t this aspect of the story been reported by the press — those gimlet-eyed guardians of the public weal, whose ministrations keep the American public informed about government failings? Who knows? Maybe the New York Times, the newspaper of record, will get around to it just as soon as they get done reporting some piddly title dispute in Jerusalem, which as we all know, is the most important news in the world, duly reported by the Times. But Brooklyn? Puhleeze! Nobody goes there, except the proles, and some folks of quality hankerin’ for a good steak at Luger’s.

In the meantime, read Mike Rikon’s piece. You will be better informed if you do. Click here.